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Those who believe we don't need smart and effective crime-stopping financial regulation have only to look at the smallest independent city-state in the world, Vatican City. The tiny oligarchy is surrounded by Italy and ruled by the Pope. It also has its own bank. If you can't trust the Vatican Bank, whom can you trust? The answer is no one. At least not without proper controls and consequences for wrongdoing in this lifetime.

A Murder, a "Suicide" and Bank Collapses

Roberto Calvi, chairman of Milan-based Banco Ambrosiano, was found hanging by the neck under Blackfriars Bridge in London in June of 1982. Banco Ambrosiano had just collapsed, and London authorities deemed his suspicious death a suicide.

The "suicide" wasn't a surprise to those who paid attention to investigations into the 1974 collapse of Franklin National Bank--at the time the largest crash in the history of the United States, in which the Vatican Bank lost $55 million. A United States Comptroller of the Currency (OCC) report revealed that Big Paul Castellano (among others), underboss of the Gambino crime family, had a secret Franklin account. Investigations exposed alleged ties between Franklin banker Michela Sindona (later sentenced to 25 years in Otisville), Roberto Calvi, and U.S.-born Vatican Bank head Archbishop Paul Marcinkus. Sindona was extradicted to Italy, and in March 1986, he was found dead in his cell while serving time for ordering the murder of investigator Giorgio Ambrosioli. Apparently the prison ran out of poison-free coffee.

After Sindona's arrest, Italian banking authorities began investigating Calvi. The Vatican Bank allegedly set up foreign dummy subsidiaries for Roberto Calvi's holding company, and Marcinkus was on the board of some of them. These subsidiaries lent millions of Banco Ambrosiano's money to the Vatican's special purpose corporations. When Banco Ambrosiano crashed, $1.3 billion of deposits were missing.

In 1998, Italian investigators used modern forensics to perform a new examination of Calvi's remains. They concluded Calvi's murder was staged to look like a suicide. In 2005, several Italian mafia-connected alleged co-conspirators were indicted for Calvi's murder, and all were later acquitted due to lack of evidence.

Italy separately indicted Archbishop Paul Marcinkus for financial crimes related to Banco Ambrosiano's collapse. He hid in the Vatican for six years during the papacy of John Paul II. The Vatican eventually got Italy to drop the charges. The Vatican Bank paid a $250 million settlement to the defrauded depositors of Banco Ambrosiano in "recognition of moral involvement." Archbishop Marcinkus reportedly later said that he raided the Vatican pension fund to come up with the money. Marcinkus returned to the United States in 1990 and retired to Sun City, Arizona, where he died in 2006 at the age of 84.

An Unpardonable Sin

Archbishop Marcinkus never came forward to tell Italian investigators what he knew, not even after the deaths of several investigators, and not even after evidence showed Roberto Calvi was murdered. Moreover, Pope John Paul II--and later Pope Benedict XVI--let him get away with it.

Roberto Calvi was a Catholic, and suicide was once considered--and is still considered by many Catholics--an unpardonable sin. Given the suspicious circumstances of Calvi's death, it was a moral failing for Catholic leadership to remain silent when asked to give evidence. As a practical matter, Calvi's family--innocent of any wrongdoing--couldn't collect life insurance when the death was labeled a suicide.

But murder and suspicious financial transactions are not the only crimes on which the Catholic Church has remained silent. Scores of priests and former priests in the United States are accused of sexually abusing children over a period of decades, while their superiors covered-up their crimes. The Church is losing followers in the United States. The number of seminarians studying to become priests has dropped by two-thirds from what it was forty years ago.

In April 2005, German-born Joseph Alosius Ratzinger became Pope Benedict XVI, the 265th head of the Catholic Church. He expressed a firm resolve to clean up the sex abuse and "filth" in the Catholic Church. Yet in July 2012, Der Spiegel reported that the Vatican Bank is allegedly engulfed in another scandal involving suspect money transfers and shady bank accounts. Gotti Tedeschi, former head of the Vatican Bank and Pope Benedict XVI's confidant, was detained by Carabinieri, Italy's military police, in a corruption investigation involving an Italian subsidiary of Spain's Banco Santander. Tedeschi's files suggest Church complicity in circumventing European money-laundering rules. Details of the scope of this new financial scandal are still unfolding.

Endnote: The above commentary is non-fiction and is based on chapter two of my book for financial professionals, Structured Finance & Collateralized Debt Obligations (Wiley, 2003, 2008). Readers who enjoy contemporary fiction with a backdrop of history may enjoy my just-released debut fiction e-book, Archangels: Rise of the Jesuits. Here's a blurb: When Italian intelligence specialist Michael Visconte investigates the murder of a Jesuit priest, the priest turns out to be a hedge fund manager with an unblemished record of extraordinary returns. Although the Pope rules the Vatican sovereign state as the ultimate oligarchy, the Jesuits ask Visconte, their former student, to help them bring justice. Michael soon finds himself in the middle of a struggle for power and control over the finances of the Vatican. But his lucky break--one that should provide critical evidence--only blurs the lines between good and evil and endangers the lives not only of Michael and the Jesuits but of his wife and children.

If you don't have a Kindle, you can download a free Kindle app available for iPads, Android Tablet, Windows 8, iPhones, iPod touch, Android, Windows Phone 7, Blackberry, or cloud reader for your browser. Amazon Prime members can borrow this book for free on Kindle.